Lockheed's Japan Contract Bonanza

A $4 billion contract should make investors salivate.

Lockheed Martin's (NYSE: LMT) stock has been moving at a snail's pace after recording a fresh 52-week low last month. However, the underperformance may not last long if the Pentagon's No. 1 supplier succeeds in winning a $4 billion contract to supply 40 fighter jets to Japan.

Japan is shifting its Cold War-era defense strategy and is now focusing more on the geopolitical tensions in the region. The country needs to replace its aging F-4 Phantoms that have been in service for almost 30 years now. Moreover, with 18 of its F-2 aircrafts destroyed in the March earthquake and tsunami, Japan looks really keen to acquire new fighters. The country is expecting bids this month from various players.

What's the deal?Japan, which was always eyeing Lockheed's F-22, has decided to settle for the maker's fifth-generation F-35 Joint Strike Fighter because of the U.S. ban on F-22 exports. Lockheed counts on its superior stealth technology, which allows aircraft to spy and combat jointly.

However, the landscape is dotted with competitors. Lockheed is facing stiff competition from its peers, Boeing(NYSE: BA) and Eurofighter. Boeing's F-18 Super Hornet, a fourth-generation fighter, and Eurofighter's Typhoon are hard to detect on radar and prove beneficial for attacking or spying on the enemy. But the stealth technology of the F-35 allows the plane to have better anti-radar capabilities than what Boeing or Typhoon can offer and thus provides Lockheed with a winning edge.

And now for something completely differentHowever, there is a small twist in the story. The development phase of the F-35 has been extended to 2016. And that's a long time to wait for Japan, considering North Korea's aggressive posturing and the fast changing-geopolitical dynamics in Japan's part of the world. This could be an advantage for Boeing. Also, If Japan opts for F-18s, then there's an added advantage of employing the services of Northrop Grumman(NYSE: NOC), specializing in providing major components in Boeing aircrafts.

However, I still believe Lockheed has a better hand. With its focus on superior spying, I doubt that Japan will settle for fourth-generation fighters. Clearly, the F-35 is worth the wait.

Foolish bottom lineThough only time will tell who gets to grab the $4 billion deal, Lockheed's expertise in stealth technology and its long association with Japan improve its chances manifold. Coming at a time when the company lost an $11 billion contract from India and the defense industry is witnessing steeper budget cuts, investors would welcome such a deal -- if it happens.